Manufacturing contraction eases

By Beatrice M. Laforga, Reporter

FACTORY ACTIVITY fell for a fourth straight month in June, although the pace of contraction eased significantly as manufacturers were able to boost output for the first time since February, according to a survey by IHS Markit.

IHS Markit in a statement on Wednesday said the Philippines manufacturing Purchasing Managers’ Index (PMI) jumped to 49.7 last month from 40.1 in May, but still remained below the 50 neutral level separating contraction from expansion.

A PMI reading below 50 signals deterioration in operating conditions compared to the preceding month, while a reading above 50 denotes improvement.

“June PMI survey data showed a further considerable easing in the downturn across the Filipino manufacturing sector, as operating conditions were close to stabilization and output levels increased for the first time since February,” IHS Markit said.

IHS Markit said this “signalled a further movement toward stabilization in the Filipino goods-producing sector.”

The headline PMI measures manufacturing conditions through the weighted average of five indices: new orders (30%), output (25%), employment (20%), suppliers’ delivery times (15%) and stocks of purchases (10%).

Easing of quarantine measures helped improve business confidence during the month, as companies hope sales will begin recovering, IHS Markit said.

Among the ASEAN region, the Philippines recorded the third-highest reading despite the slight contraction, trailing Vietnam’s 51.1 headline index and Malaysia with 51.

The country’s latest reading was just above Myanmar’s 48.7 and higher than the regional average of 43.7 for the month.

IHS Markit attributed the improvement in Philippine manufacturing conditions to higher output levels which expanded for the first time in four months, as firms ramped up production as the economy slowly reopened and others restarted operations after months of closure.

Overall demand also “notably improved, with new orders still falling but at a greatly reduced speed” locally, and more so overseas as restrictions were eased across the globe, IHS Markit said. Companies also saw a pickup in demand and orders from customers.

However, businesses said new work “remained weak” on pandemic fears and as other restrictive measures were still in place.

“The change in government COVID-19 (coronavirus disease 2019) rules to the general community quarantine helped the manufacturing sector make large strides towards stability in June,” IHS Markit Economist David Owen was quoted as saying.

Employment, meanwhile, continued to decline last month.

“Firms have noticeably held back from hiring as a result of weak demand, as employment numbers dropped at the steepest rate since March,” Mr. Owen said.

According to the survey, many firms decided to keep their workforce at a minimum and did not hire new workers to replace those who left. Some companies, on the other hand, increased their staff to boost capacity.

“The sharper decline in workforces suggests that manufacturers may need to see a strong rebound in goods demand before job levels can expand,” Mr. Owen added.

As demand remains slow, IHS Markit said factories were able to catch up with their backlog after shutting down during the lockdown.

“Signs from new orders and export orders data are encouraging, but the recovery may still be gradual as the pandemic continues and even accelerates in some regions,” Mr. Owen added.

Buying activity also dropped for four months in a row but at its slowest pace. Inventories of pre- and post-production goods were still curbed as the manufacturers only produced the volume needed to meet the orders.

“On the receipt of purchased items, manufacturers saw a further lengthening of lead times during June which signalled the eleventh monthly extension in a row,” IHS Markit said.

Delivery services were limited, it said, since suppliers were also working with minimal workforces to observe physical distancing.

Meanwhile, IHS Markit said input prices posted a sharp increase last month, with supplier prices rising faster due to difficulties in transportation and costlier freight charges.

While companies increased their selling prices slightly due to higher input costs, IHS Markit said there were companies that offered discounts to attract buyers and boost sales.

“The year-ahead outlook for manufacturing output rose to its highest since February, with companies seeing greater reason for optimism as the government relaxed COVID-19 quarantine measures,” it said.

For Ruben Carlo O. Asuncion of UnionBank of the Philippines, Inc., the higher headline reading in June was expected and will likely sustain the trend as the economy continues to reopen.

Mr. Asuncion said stricter restrictions are still imposed in some parts of the country such as in Cebu due to the rising number of new COVID-19 positive cases.

“With these recent developments, the effectiveness and consequent success of the NPIs (non-pharmaceutical initiatives) may spell the impact on the manufacturing sector’s recovery. Nevertheless, I posit that the potential recovery may be sooner rather than later because of the continued appropriate adjustment of work protocols following necessary health standards to allow the continuation of production without sacrificing health and safety,” he said.

For the Emerging Asia region, think tank Capital Economics said in a note that the improvement in manufacturing PMI across the region is still low, which shows companies are still struggling.

“It appears that the worst has passed for industry,” Capital Economics said, noting there was a “sizable rebound” for the sector in the region especially in the Philippines and Indonesia.

Capital Economics expects business conditions for the manufacturing sector to “continue improving gradually as external demand recovers,” while production will remain below pre-pandemic levels in the coming months on dampened demand.

“PMI readings suggest that a further easing of lockdown restrictions and a nascent recovery in external demand have helped improve conditions for manufacturers. But output is still likely to be well below normal levels for many months to come as domestic and global demand remains depressed,” it said.